[NYTr] Booming Economy: ECB pledges more liquidity boosting if needed

[All the News That Doesn't Fit]

Financial Times - Sep 5, 2007
http://www.ft.com/cms/s/0/370f2db0-5bb6-11dc-bc97-0000779fd2ac.html


ECB pledges more liquidity boosting if needed

By Ralph Atkins

FRANKFURT, Germany -- The European Central Bank announced on Wednesday
that it is ready to intervene again to relieve tension in financial
markets, the day before its governing council meets to discuss
interest rate policy.

The ECB's pledge to launch a fresh liquidity-boosting operation on
Thursday if necessary followed sharp rises in overnight interest
rates and an earlier attempt by the Bank of England to calm financial
market pressures. Euro overnight interest rates had earlier hit
4.685 per cent, almost as high as on August 9 when the ECB injected
an unprecended E94.8 billion into money markets.

In a statement, the ECB said that volatility in the euro money
market had increased that it was "closely monitoring" the situation.
It went on: "Should this persist tomorrow, the ECB stands ready to
contribute to orderly conditions in the euro money market."

Its action undermined the ECB's recent claims that conditions in
money markets were normalising.

Meanwhile, the ECB governing council will meet on Thursday for its
regular monthly discussion of monetary policy. Although the central
bank signalled at the start of August that a quarter point rise in
its main interest rate to 4.25 percent was likely in September,
Jean-Claude Trichet, ECB president, has signalled subsequently that
the bank had reconsidered its options. A rise on Thursday would now
shock financial markets -- something the ECB would want to avoid.

So far the ECB has seen a clear distinction between its main monetary
policy decisions -- aimed at combating long-term inflation dangers
-- and measures to aimed at ensuring properly functioning markets.

The special liquidity-boosting operations, launched by the ECB on
August 9 and continued over successive days, was followed by similiar
action to restore order into the markets for three month money.

Details of the type of operation that may be launched on Thursday
have not been decided. The ECB may decide to hold a one-day operation
or a tender that lasts until the beginning of next week. But the
ECB seems unlikely to let the market decide the volume of extra
liquidity it requires -- as it did on August 9. Instead, it is more
likely to launch a "variable rate" tender in which it decides how
much extra liquidity to inject.

Julian Callow, economist at Barclays Capital, said that at this
stage of the monthly interest rate-setting cycle the ECB was having
to judge carefully how to keep overnight rates in line with its
main policy rate. "So we don't think this could presage some more
radical solution to easing the liquidity issues such as cutting
reserve requirements to liberalise more collateral, or to revive
the dollar-euro swap facility it announced soon after the September
11, 2001, terrorism with the US Federal Reserve."